Private equity floats lag ordinary IPOs in 2015

Private-equity-led floats such as Adairs have trailed the returns of ordinary initial public offerings for a second year but the buyout industry still insists it delivers better outcomes for investors over a longer period.

Annual performance data released by AVCAL, the Australian Private Equity and Venture Capital Association, and Rothschild reveal that non-PE-backed IPOs in 2015 achieved an average return of 19.3 per cent, outperforming buyout-led IPOs which earned an average return of 13.1 per cent. Some of the strongest performers recorded were Gateway Lifestyle Operations, CBL, Beston Global Food, and Pepper Group, measured to December 31.

In 2013, which is acknowledged as the year that the IPO market reopened after the flawed Myer float, private equity outdid its peers with a return of 19.6 per cent versus 1.4 per cent for other IPOs.

Dick Smith, which went into administration on January 5 and is now the basis of a Senate inquiry, has created a fresh reputational headache for the industry even though some private equity investments – including hot small cap Eclipx​ Group – have flourished in public hands. Dick Smith was floated by Anchorage Capital.

AVCAL's preferred three-year view is more flattering to the performance of private equity investments.

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"We've seen a consistent pattern of PE-backed IPOs outperforming on average over the last three years," said Yasser El-Ansary, chief executive of AVCAL, on Monday. "The fact that these companies continue to perform once the PE firm begins to sell down, or has exited, its stake, demonstrates the sustained value that PE can bring to an investee company."

Share price returns for all companies that have debuted on the ASX since January 2013 see PE-backed IPOs chalk up an average return of 40.9 per cent, beating non-PE backed IPOs, which stand at 25.5 per cent. The longer-range analysis captures some of the biggest failures on both sides of the fence, with Dick Smith at the bottom of the PE group and McAleese dragging down the rest of the floats.

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Patent law firm IPH best float

The outright best float in the sample period is IPH, the patent law firm, which achieved a 322 per cent return since listing in late 2014. IPH was floated by the principals behind the company, which trades under the name Spruson & Ferguson.

Stuart Dettman, who is the head of Rothschild equity advisory in Australia, foreshadowed that market volatility would probably mean fewer new offerings coming to the ASX in 2016.

"I think it's likely we're going to get less activity in IPOs this year compared to prior years; the market's certainly not closed but volatility is very high at the moment," he told The Australian Financial Review. "There's still some good quality companies out there to come to market."

Mr Dettman disagreed that the best IPOs come in the first year of the IPO cycle. "You can go back over each year and identify very strong performers in each of the years that come to market. It's very much dictated by when the company's ready."

This time, Rothschild included information about how stocks perform following a secondary offering. It is not uncommon for vendors to hold on to some of their stake after IPO, subject to an escrow period of around two years; those shares can then be offered to the market in a block trade. Average returns for investors who participate in selldowns of PE-backed IPOs is 16.5 per cent. There have been 21 selldowns across 11 PE-backed companies (some stocks had up to four selldowns) since 2013.

The survey includes any company with an offer size above $100 million, excluding listed investment companies, and any dividends paid to shareholders. There are 18 companies in the 2015 survey (seven from private equity), and 67 in the three-year survey (30 from private equity).

The inquiry into causes and consequences of the collapse of listed retailers in Australia is accepting submissions until March 18 and will report on May 12. It was brought by independent senator Nick Xenophon.